-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bm2VOuHQApYVbMvxZcmWw2CdEO+BQrroCU4kRSpPIb6j+SgBrmImnxrFdQGzHb+4 yvN8s5ziKqrbhXM/Gq9Fcg== 0000898430-96-001316.txt : 19960416 0000898430-96-001316.hdr.sgml : 19960416 ACCESSION NUMBER: 0000898430-96-001316 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960229 FILED AS OF DATE: 19960415 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SALICK HEALTH CARE INC CENTRAL INDEX KEY: 0000762131 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 953843861 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13879 FILM NUMBER: 96547207 BUSINESS ADDRESS: STREET 1: 8201 BEVERLY BLVD CITY: LOS ANGELES STATE: CA ZIP: 90048-4520 BUSINESS PHONE: 2139663400 MAIL ADDRESS: STREET 1: 8201 BEVERLY BLVD CITY: LOS ANGLES STATE: CA ZIP: 90048-4520 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended February 29, 1996 ------------------------------------ OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from to ----------------------- --------------------- Commission file number 0-13879 ------------------------------------------------------- SALICK HEALTH CARE, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-4333272 - ------------------------------- -------------------------------- (State or other jurisdiction of (I.R.S Employer incorporation or organization) identification number) 8201 Beverly Boulevard, Los Angeles, California 90048-4520 - --------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (213) 966-3400 - --------------------------------------------------------------------- (Registrant's telephone number, including area code) No Change - --------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO_____ ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: 5,657,115 shares of common stock, $.001 par value at March 31, 1996 - ------------------------------------------------------------------------------- 5,640,082 shares of callable puttable common stock, - -------------------------------------------------------------------------------- $.001 par value, at March 31, 1996 - -------------------------------------------------------------------------------- Exhibit Index on Page 21 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SALICK HEALTH CARE, INC. CONSOLIDATED BALANCE SHEETS
ASSETS February 29, 1996 August 31, 1995 ------------------ ---------------- (UNAUDITED) Current assets: Cash $ 378,000 $ 642,000 Marketable securities 46,580,000 44,631,000 Accounts receivable, less allowance for doubtful accounts of $3,353,000 and $2,885,000 42,253,000 36,248,000 Inventories 1,801,000 1,305,000 Prepaid expenses 2,256,000 1,677,000 Other current assets 2,333,000 1,967,000 Refundable income taxes 2,545,000 2,545,000 Deferred income taxes 3,326,000 5,047,000 ------------ ------------ Total current assets 101,472,000 94,062,000 Property and equipment, at cost, less accumulated depreciation and amortization of $36,735,000 and $32,841,000 105,736,000 101,651,000 Deposits 706,000 725,000 Deferred income taxes 862,000 Goodwill, net 5,613,000 5,494,000 Other assets 5,838,000 5,166,000 ------------ ------------ $220,227,000 $207,098,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to bank $ 33,379,000 $ 18,072,000 Accounts payable and accrued liabilities 35,092,000 41,063,000 Income taxes payable 2,311,000 Current portion of long-term obligations 3,169,000 4,952,000 ------------ ------------ Total current liabilities 73,951,000 64,087,000 Deferred income taxes 67,000 Capitalized lease obligations, less current portion 4,792,000 5,235,000 Long-term debt, less current portion 4,842,000 5,910,000 Other liabilities 2,000,000 2,400,000 Minority interest (30,000) (29,000) ------------ ------------ Total liabilities 85,555,000 77,670,000 ------------ ------------
2 SALICK HEALTH CARE, INC. CONSOLIDATED BALANCE SHEETS
February 29, 1996 August 31, 1995 ----------------- --------------- (UNAUDITED) Commitments and contingencies Stockholders' equity: Preferred stock, $.001 par value, 5,000,000 shares authorized, none issued Common stock, $.001 par value, 15,000,000 shares authorized, 5,657,115 shares issued and outstanding 6,000 6,000 Callable puttable common stock, $.001 par value, 7,500,000 shares authorized, 5,640,082 and 5,634,082 shares issued and outstanding 5,000 5,000 Additional paid in capital 79,810,000 79,738,000 Unrealized holding gains 229,000 44,000 Retained earnings 54,622,000 49,635,000 ------------ ------------ Total stockholders' equity 134,672,000 129,428,000 ------------ ------------ $220,227,000 $207,098,000 ============ ============
See accompanying notes to consolidated financial statements. 3 SALICK HEALTH CARE, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended February 29, February 28, February 29, February 28, ------------------ ----------------- ------------- ------------- 1996 1995 1996 1995 ------------------ ----------------- ------------- ------------- Revenues: Operating revenues, net $39,110,000 $38,170,000 $76,624,000 $74,346,000 Operating expenses: Medical supplies and services 7,459,000 6,601,000 14,300,000 12,982,000 Salaries and related costs 16,400,000 15,774,000 31,621,000 30,344,000 Other administrative expenses 5,606,000 5,048,000 11,080,000 10,455,000 Contract and occupancy costs 4,250,000 4,183,000 8,234,000 7,886,000 Depreciation and amortization 2,211,000 2,039,000 4,377,000 4,079,000 ----------- ----------- ----------- ----------- Total expenses 35,926,000 33,645,000 69,612,000 65,746,000 ----------- ----------- ----------- ----------- Operating income 3,184,000 4,525,000 7,012,000 8,600,000 Merger transaction expenses (526,000) (526,000) Net interest income 252,000 264,000 956,000 281,000 Net investment gains (losses) 192,000 (63,000) 277,000 (124,000) Minority interest 225,000 550,000 ----------- ----------- ----------- ----------- Income before income taxes and cumulative effect of change in accounting principle 3,628,000 4,425,000 8,245,000 8,781,000 Provision for income taxes 1,411,000 1,825,000 3,258,000 3,543,000 ----------- ----------- ----------- ----------- Income before cumulative effect of change in accounting principle 2,217,000 2,600,000 4,987,000 5,238,000 Cumulative effect on prior years (to August 31, 1994) of expensing pre-operating costs as incurred, net of income taxes (3,588,000) ----------- ----------- ----------- ----------- Net income $ 2,217,000 $ 2,600,000 $ 4,987,000 $ 1,650,000 =========== =========== =========== ===========
4 SALICK HEALTH CARE, INC. CONSOLIDATED STATEMENTS OF INCOME (CONTINUED) (UNAUDITED)
Three Months Ended Six Months Ended February 29, February 28, February 29, February 28, ------------------ ----------------- ------------ ------------- 1996 1995 1996 1995 ------------------ ----------------- ------------ ------------- Earnings per share: Primary: Income before cumulative effect of change in accounting principle $ 0.20 $ 0.26 $ 0.44 $ 0.56 Cumulative effect on prior years (to August 31, 1994) of expensing pre-operating costs as incurred (0.38) ------------ ------------ ------------ ------------ Net earnings per share $ 0.20 $ 0.26 $ 0.44 $ 0.18 ============ ============ ============ ============ Fully diluted: Income before cumulative effect change in accounting principle $ 0.20 $ 0.25 $ 0.44 $ 0.53 Cumulative effect on prior years (to August 31, 1994) of expensing pre-operating costs as incurred (0.34) ------------ ------------ ------------ ------------ Net earnings per share $ 0.20 $ 0.25 $ 0.44 $ 0.19 ============ ============ ============ ============ Weighted average number of shares used in computing earnings per share: Primary 11,309,000 9,985,000 11,308,000 9,414,000 ============ ============ ============ ============ Fully diluted 11,309,000 10,738,000 11,309,000 10,736,000 ============ ============ ============ ============
See accompanying notes to consolidated financial statements. 5 SALICK HEALTH CARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended February 29, February 28, ------------- ------------- 1996 1995 ------------- ------------- Cash flow provided (used) by operations: Net income $ 4,987,000 $ 1,650,000 Add items not requiring cash: Depreciation and amortization 4,377,000 4,079,000 Amortization of debt issue costs 23,000 Deferred income taxes 792,000 (248,000) Minority interest in net loss, net of distributions (1,000) (673,000) Cumulative effect on prior years (to August 31, 1994) of expensing pre-operating costs as incurred 5,981,000 Changes in assets and liabilities: Accounts receivable (6,005,000) (8,049,000) Inventories (496,000) (203,000) Prepaid expenses (579,000) (679,000) Other current assets (366,000) 121,000 Deposits and other assets (807,000) 92,000 Accounts payable and accrued liabilities (6,379,000) 1,997,000 Income taxes payable 2,311,000 (1,718,000) ------------ ------------ Net cash flow provided (used) by operations (2,166,000) 2,373,000 ------------ ------------ Cash flow provided (used) by investing activities: Increase in marketable securities (1,764,000) (921,000) Additions to property and equipment (8,180,000) (14,428,000) Payment for purchase of acquisitions (168,000) (150,000) ------------ ------------ Net cash flow used by investing activities (10,112,000) (15,499,000) ------------ ------------ Cash flow provided (used) by financing activities: Reduction of capitalized lease obligations (530,000) (470,000) Decrease of long-term debt (2,835,000) (876,000) Notes payable to bank 15,307,000 12,172,000 Issuance of common stock 72,000 811,000 ------------ ------------ Net cash flow provided by financing activities 12,014,000 11,637,000 ------------ ------------
6 SALICK HEALTH CARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED)
Six Months Ended February 29, February 28, ------------ ------------ 1996 1995 ------------ ------------ Decrease in cash $(264,000) $(1,489,000) Cash, beginning of period 642,000 1,692,000 --------- ----------- Cash, end of period $ 378,000 $ 203,000 ========= =========== Schedule of non-cash investing and financing activities: Conversion of 7.25% convertible subordinated debentures due January 31, 2001 into common stock $25,575,000 =========== Capital lease obligations incurred for property and equipment $ 70,000 $ 2,265,000 ========= =========== Deferred bond issue costs $ 400,000 =========== Unrealized holding gains (losses) $ 185,000 $ (100,000) ========= ===========
See accompanying notes to consolidated financial statements. 7 SALICK HEALTH CARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 - In the opinion of management, the information furnished reflects all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the interim financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's August 31, 1995 audited financial statements. The results of operations for the three and six month periods ended February 29, 1996 are not necessarily indicative of the operating results for the full year. Note 2 - In fiscal 1995, the Company changed its method of accounting from deferral to expensing pre-operating costs as incurred. In prior years, pre-operating costs had been deferred and amortized over a three year period upon commencement of facility operations. In fiscal 1995 fourth quarter, giving effect to the first quarter, the Company recorded the cumulative effect of the change in accounting principle of $3,588,000, net of income taxes of $2,393,000. In the accompanying financial statements, the fiscal 1995 periods have been restated to reflect the current and cumulative effects of the change in accounting principle. This change in accounting for pre-operating costs was adopted as management believes this method of accounting better reflects the Company's current methods of operations and it conforms to the method followed by Zeneca Group, PLC, the beneficial owner of more than 50% of the Company's common equity. Note 3 - On December 27, 1995, a Columbia/HCA Healthcare Corporation subsidiary, the owner of one of the Company's Cancer Center affiliated hospitals, Westlake Medical Center, announced that it was closing Westlake Medical Center. Under the terms of the agreement with Columbia/HCA, a subsidiary of the Company had the right to and gave notice of its intent to purchase Westlake Medical Center with the purchase price of the hospital being determined by three appraisers taking into account, among others, the fact that the hospital is intended to be used for the treatment of patients with cancer, kidney disease, organ transplantation, AIDS and related illnesses. The Company expects the purchase to be consummated during the summer of 1996. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SECOND FISCAL QUARTER ENDED FEBRUARY 29, 1996 COMPARED TO SECOND FISCAL QUARTER - ------------------------------------------------------------------------------- ENDED FEBRUARY 28, 1995 - ----------------------- Operating revenues increased in the second quarter of fiscal 1996 by 2.5% to $39,110,000 from $38,170,000 in the second quarter of fiscal 1995. Operating income was $3,184,000 or 29.6% below the prior year's second quarter and operating margins were 8.1% and 11.9% in the quarters ended February 29, 1996 and February 28, 1995, respectively. Income before taxes and the cumulative effect of change in accounting principle described below and in the notes to the consolidated financial statements was reduced by 18% to $3,628,000 in the current fiscal quarter from $4,425,000 in fiscal 1995. Net income was $2,217,000, as compared to $2,600,000 in the prior year's second quarter. For the six month periods, operating revenues increased by 3.1% to $76,624,000 from $74,346,000 with operating income of $7,012,000 or 18.5% less than the prior six month period. Income before the cumulative effect of change in accounting principle decreased $251,000 or 4.8% representing 6.5% of operating revenues, down from 7% for the corresponding six month period. Weighted average shares outstanding used in computing earnings per share increased over the second quarter and six month periods in fiscal 1995 due to exercise of stock options in connection with the Company's April 13, 1995 merger with a subsidiary of Zeneca Limited and conversion of the Company's subordinated convertible debentures in January 1995. The quarter and six month results reflect an increase in business particularly in the volume of the Company's managed care business which generally has lower reimbursement rates, an increase in the total dollar amounts of payments received for the Company's services and programs under capitated (per member per month) agreements and other changes, primarily consisting of reductions in reimbursement resulting in an increase in the Company's contractual allowance expense. Revenues, operating income and net income were also affected by expansion of the Company's services and programs, additional costs in connection with the opening and operations of permanent facilities at Alta Bates and Mount Sinai Comprehensive Cancer Centers, the results of operations of the Company's recently acquired Walnut Creek, California facility which is affiliated with the Alta Bates Comprehensive Cancer Center, the expansion of programs and the addition of personnel and related costs to support and expand the Company's development, strategic planning, information systems and physician network activities. During second quarter fiscal 1996 the Company has acquired The Breast Center in Van Nuys, California, the first free-standing multidisciplinary breast center in the United States and one of the nation's most highly respected medical facilities in the field of breast disease. In addition, the Company entered into an agreement with Pacific Hematology-Oncology Associates (PHOA), a highly respected physician group specializing in oncology in San Francisco. Under the terms of this agreement, PHOA facilities and physicians are a San Francisco affiliate facility for the Alta Bates Comprehensive Cancer Center. 9 The Company's change in accounting principle from deferring to expensing pre-operating costs when incurred, as described in Note 2 to the consolidated financial statements adversely affected both fiscal 1995 and 1996 second quarter and six month operating income, net income and earnings per share. The Company adopted this method of accounting for pre-operating costs in fiscal 1995 based on management's belief that this method of accounting better reflects the Company's current methods of operations and as it also conforms to the method followed by Zeneca Group, PLC, the beneficial owner of more than 50% of the Company's common equity. The cumulative effect of the change in accounting principle resulted in a non-recurring, non-cash charge of $3,588,000 net of income taxes of $2,393,000, as of the beginning of fiscal year 1995. Second quarter primary and fully diluted earnings per share decreased to $0.20 from $0.26 and $0.25, respectively. For the six months ended February 29, 1996, earnings per share, on a primary basis, increased to $0.44 from $0.18 and on a fully diluted basis to $0.44 from $0.19 due to the cumulative effect on prior years in the change of accounting method. Net interest income increased to $956,000 from $281,000 in the six month period primarily as the result of the call of the Company's 7-1/4% Convertible Debentures. Net investment income increased over the second quarter and six month 1995 amounts due to capital gains realized in the Company's marketable securities portfolio. No assurances can be made that investment income will continue as it is dependent on a variety of sources which are beyond the Company's control. Fiscal 1995 second quarter net income and earnings per share were adversely affected due to non-recurring transaction expenses of $526,000 in connection with the Company's Agreement and Plan of Merger with Zeneca Limited. Operating results have been and will continue to be adversely affected by reductions in reimbursement rates mandated by Congress, including those pursuant to the Omnibus Budget Reconciliation Acts (OBRA) of 1990-1993 which impact health care providers for many services provided to Medicare beneficiaries. The principal reductions applicable to the Company are a continuation of the 5.8% reduction in reimbursement of outpatient cost-based programs through fiscal year 1998; a continuation of the 10% reduction in hospital outpatient capital reimbursement through fiscal year 1998; and a change in the manner of reimbursement for Erythropoietin for dialysis patients, effective January 1, 1991 which was further reduced beginning on January 1, 1994. The Company has implemented strategies, including programs to increase both Medicare and non- Medicare patient volume and the implementation of cost control programs, that have substantially mitigated the effect of these changes. See "Impact of Inflation and Changing Regulation." Total operating expenses relative to operating revenues increased 3.7% for the second quarter of fiscal 1996 and 2.4% for the six months of fiscal 1996, before interest and investment expense, as compared to the prior year. Medical supplies and services expense increased by $858,000 and $1,318,000 during the quarter and six month periods, a 1.8% and 1.2% increase, respectively, as a percentage of revenues, primarily the result of activity under the Company's capitated fee program, increasing complexity in cancer 10 and dialysis treatment modalities and supplier price escalations. The addition of professional, corporate, administrative and other personnel necessitated by current and anticipated expansion and growth, primarily in Cancer Center and related operations, and increases in compensation and payroll taxes caused salaries and related costs to increase by $626,000 and $1,277,000 in the three and six month periods in 1996 compared to 1995. As compared to the prior year periods, other administrative expenses for fiscal 1996 increased 1.1% for the quarter and .4% for the six months, as a percent of operating revenues. Contract and occupancy costs decreased .1% in the quarter and increased .1% in the six month period, respectively, as a percentage of net operating revenues, principally resulting from increased contract costs under contractual agreement terms with certain of the Company's affiliated hospitals. Depreciation and amortization increased by $172,000 and $298,000 as compared to the second fiscal quarter and six months of 1995 due to depreciation of additional clinic equipment placed in service during the past year. Income taxes were calculated at a 39.5% rate in the fiscal 1996 six month period versus 40.3% in the prior year six month period. The Company expects to utilize available federal capital loss carrryforwards in the current fiscal year, lowering the Company's tax rates and increasing cash flow. LIQUIDITY AND CAPITAL COMMITMENTS Presently existing and internally generated funds and credit facilities are expected to be sufficient to satisfy the Company's requirements for working capital and capital expenditures relating to its present operations in fiscal 1996. The accelerated development, establishment or acquisition of a significant number of additional Cancer Centers and/or dialysis centers or other acquisitions or operations may require borrowing or equity financing by the Company. Working capital at February 29, 1996 was $27,521,000. The decrease in working capital during the current period as compared to fiscal 1995 year end is principally due to increased short term borrowings to finance facilities construction. The increase in accounts receivable at February 29, 1996 as compared to August 31, 1995 is due to the previously mentioned increased revenues which resulted from growth in patient volumes and services provided at the Company's cancer centers and dialysis facilities. The Company's principal sources of liquidity consist of cash on hand, interest-bearing investments, internal cash flow and a revolving bank line of credit of $80,000,000. At February 29, 1996, $33,379,000 had been borrowed under the revolving bank line of credit. The line of credit agreement provides various options for interest rates. Unless the Company elects an optional interest rate, borrowings under the line of credit are subject to the bank's prime rate of interest. At February 29, 1996, the Company held in its portfolio cash, government and investment grade debt securities and equity securities. These investments represent 100% of the total portfolio at fair value and reflect the Company's policy to invest its funds in government and investment grade 11 securities. In accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"), the Company has increased the carrying value of its portfolio to fair value of $46,580,000 from cost of $46,351,000. As of February 29, 1996, the Company's five largest investments in municipal and corporate debt securities, all of which were investment grade aggregated $6,871,000 at fair value, with cost of $6,949,000. The single largest investment approximated $2,425,000 with a cost of $2,431,000. Capital expenditures for the remainder of fiscal year 1996 and the April 1996 distribution to former common stockholders pursuant to the merger are presently estimated to be approximately $48,000,000. As to these and other needs, certain equipment and/or facilities may be acquired through leases or purchase-finance agreements. IMPACT OF INFLATION AND CHANGING REGULATION The largest single component of the Company's revenue continues to be reimbursement at rates which are set or regulated by federal or individual state authorities. These reimbursement rates are also subject to periodic adjustment for certain factors, including changes in legislation and regulations, those imposed pursuant to the federal and individual state budgets, inflation, area wage indices and costs incurred in rendering the services. The reimbursement rates may in the future, as they have in the past, also be affected by the impact of managed care organizations, cost containment and other legislation, competition, third party payor changes or other governmental administrative controls or limitations. Changes in the Medicare and Medicaid system and reimbursement have been proposed by both Republican and Democrat members of Congress. While the Company expects changes in reimbursement to occur, this may be limited to extensions of previously implemented reductions scheduled to expire or may include additional changes. The ultimate impact of any of the above described and other changes that may occur and their effect on the Company's business cannot be predicted, in part due to budgetary constraints and the rapidly evolving changes in the health care system generally. Under federal Medicare law, most hospital inpatients covered by Medicare are classified into diagnostic related groups ("DRGs") based on such factors as primary admitting diagnosis and surgical procedure. Payment to hospitals for the care of a patient covered under the DRG system is generally set at a predetermined amount based on the DRG assigned the patient. The federal government, as well as many states and third party payors, are investigating or have adopted these or other modifications to their reimbursement formula in an effort to contain costs. This type of program provides an incentive for hospitals to plan and deliver their services more efficiently. The Omnibus Budget Reconciliation Act of 1990 amended the definition of "inpatient hospital services" to include all services for which payment may be made under the DRG system that are provided by a hospital or an entity wholly- owned or operated by the hospital to a patient during the three days immediately preceding the date of the patient's admission (or one day for hospitals and hospital units excluded from the DRG system under technical 12 changes enacted in October 1994), if such services are diagnostic services (including clinical diagnostic laboratory tests) or are other services related to the admission, as defined by the Secretary of Health and Human Services ("the Secretary"). Such services are not reimbursable separately as hospital outpatient services under Medicare Part B. These provisions have been in effect since 1991. On January 12, 1994, the Secretary issued interim final regulations implementing this provision and on September 1, 1995, the Secretary announced she will revise the regulations to recognize that only the one day immediately preceding the date of the patient's admission would be considered to be not reimbursable separately as hospital outpatient services for hospitals and hospital units excluded from the DRG system. In recent years there have been a number of statutory and regulatory changes that affect Medicare reimbursement for services furnished to hospital outpatients. Prior to October 1, 1987, Medicare generally had reimbursed hospital outpatient services on the basis of the reasonable costs (as determined pursuant to regulations) incurred by the hospital. On October 1, 1987, Medicare began reimbursing hospitals for certain surgery services furnished to hospital outpatients on the basis of the lower of reasonable costs or an amount based on a blend of the hospital's reasonable costs and a prospectively set fee schedule amount. On October 1, 1988, this blended payment system was extended to radiology services furnished to hospital outpatient patients; the blended payment system was extended further to certain other diagnostic services on October 1, 1989. In addition, the amount of the blend that is based on the hospital's reasonable costs has decreased; currently, the blend is based 42% on hospital costs for surgery and radiology services, and 50% on hospital costs for other diagnostic services. For surgery services reimbursed under the blend, the fee schedule portion of the blend is based on the amount of payment that ambulatory surgery centers would receive for the procedure. For radiology and diagnostic services reimbursed under the blend, the fee schedule portion of the blend is based on the amount that physicians would receive if the procedure were furnished in a physician's office under the Medicare physician fee schedule. Under the Omnibus Budget Reconciliation Act of 1989, effective January 1, 1992, Medicare reimbursement for physician services began a five year transition to the use of a physician fee schedule based on a "resource-based relative value scale." That physician fee schedule, through the blended payment system described above, has affected the amount of Medicare reimbursement for hospital outpatient departments providing outpatient radiology, radiation therapy, surgery and certain diagnostic services. There is also the possibility of the establishment of a prospective payment for certain Medicare-reimbursed hospital outpatient services. Congress had requested that the Health Care Financing Administration ("HCFA"), which administers Medicare, prepare recommendations concerning the establishment of such a prospective payment system. HCFA submitted its recommendations to Congress in March 1995 and included a proposal to phase in such a prospective payment system, beginning first with outpatient surgery, radiology, and other diagnostic services. The details of the proposed payment system, including the amounts of payment that would be made for each 13 procedure, have not been finalized by HCFA. Adoption of HCFA's recommendation would require a change in the Medicare law by Congress,and senior HCFA staff have stated that even if Congress enacted such a change in 1996, the new system would not likely be implemented until January 1997, at the earliest. Under HCFA's proposal, services other than surgery, radiology, and other diagnostic services would not be reimbursed under a new prospective payment system until further research is completed. The Company cannot predict what will be the effect, if any, on revenues or income which may result from the adoption by Congress of HCFA's recommendations for a Medicare prospective payment for hospital outpatient services. HCFA in its March 1995 report to Congress made two other recommendations concerning proposed changes in the Medicare law. First, HCFA proposed that the Medicare law be changed to modify the way that the amount of beneficiary coinsurance for outpatient services is computed. Second, HCFA proposed that Medicare law be changed to correct what has been described as the "formula driven overpayment" which HCFA states results in Medicare payments for hospital outpatient surgery, radiology and other diagnostic services that are greater than what was intended by Congress. In its report, HCFA suggested several ways in which the Medicare law could be changed to address these issues, either with or without the enactment of a prospective payment system for hospital outpatient services. The alternatives suggested by HCFA generally would result in an overall reduction in payments for hospital outpatient services furnished to Medicare beneficiaries and, if enacted, could adversely affect the Company's revenues and income. However, it is uncertain which alternative, if any, Congress will enact, and it is impossible to determine what impact, if any, such changes might have on the Company's revenues and income. Effective October 1, 1991, Medicare payments for hospital outpatient services made on a reasonable cost basis and the cost portion of outpatient services paid on the basis of a blended amount, were reduced by 5.8%. Under the Omnibus Reconciliation Act of 1993 ("OBRA 1993"), Congress extended this reduction through federal fiscal year 1998. Effective October 1, 1991, Medicare has reimbursed the capital costs allocated to outpatient departments on the basis of 90% of reasonable costs. Under OBRA 1993, Congress extended this 10% reduction in hospital outpatient capital cost reimbursement through federal fiscal year 1998. Also under OBRA 1993, the amount which Medicare reimburses for clinical laboratory services was reduced. Effective November 1, 1990, the Medicare fiscal intermediary for the Company's dialysis facilities changed the method of reimbursing medications provided to Medicare dialysis patients from charge-based reimbursement to reimbursement based on reasonable costs. This change has reduced the amount of reimbursement to the Company for such medications and other regulatory changes potentially could further reduce such reimbursement. In addition, effective January 1, 1991, the method of reimbursement for EPO furnished to dialysis patients was changed from its former structure (80% of $40 per treatment dosage for up to 10,000 units and 80% of $70 per treatment dosage of 10,000 or more units) to provide for payment of 80% of $11.00 per 1,000 units. This change in EPO reimbursement has been partially offset by a $1.00 per treatment increase in the composite rate reimbursement for outpatient 14 dialysis services. In addition, pursuant to OBRA 1993, reimbursement for EPO was further reduced beginning January 1, 1994 to 80% of $10.00 per 1,000 units. The Secretary announced on September 1, 1995 that she will not at this time adjust the current composite rate. The overall impact of the EPO reimbursement change has adversely affected the Company's revenues and earnings. The effect of these changes may be mitigated by the Company's ability to increase its patient volume both at the same sites and at additional centers, to increase its non-Medicare and other regulated patient volume and to implement other cost controls and cost reduction strategies. To address these changes, the Company has expanded its programs and services in order to increase patient volume, and instituted other programs to achieve efficiencies in staffing, purchasing and scheduling. Legislation in Florida limits charges for certain health care services provided to non-Medicare/Medicaid patients. A substantial portion of this law has been challenged, a portion declared unconstitutional and is being appealed in the federal court system and will not be enforced until after such resolution; however, the limitations on rates respecting radiation therapy services provided at freestanding, not hospital-based facilities, presently remains in effect. As substantially all of the Company's radiation therapy services are hospital-based, the effect of the legislation has not had a material effect on the Company's operations. Florida also has legislation precluding or limiting referrals by physicians to facilities in which they have an ownership, control or investment relationship (the Florida Patient/Self- Referral Act). One of the Company's radiation facilities in South Florida currently has three physician investors who own less than two percent (2%) in total and who make no referrals to the facility. The Company believes it is in full compliance with the law. Florida adopted legislation effective in 1994 which is aimed at health care coverage for presently uninsured residents and encouraging the formation of purchasing alliances for health care services. This legislation is principally aimed at small employer groups. As it is now configured, the Company cannot predict its future effect upon the Company and its operations. However, the Company, as part of its overall strategy is in the process of developing various plans to be offered to employer groups, purchasing alliances, health maintenance organizations, managed care and other payors. The first of these plans has been successfully marketed in Florida with a major capitated (per member, per month) agreement entered into with Physician's Corporation of America currently covering 120,000 members in South Florida. To the extent that legislation or regulations may be enacted in the future which may include outpatient services furnished to Medicare beneficiaries in a prospective payment system, the Company cannot predict whether or to what extent such a change would adversely affect its revenues or earnings. In addition, in 1995 Congress began considering extensive changes to the Medicare and Medicaid programs. Medicare changes under consideration include, among others, (1) a change in the formula used to calculate hospital outpatient reimbursement under the blended payment system 15 which generally would result in reducing reimbursement amounts; (2) an extension of the current 5.8% reduction in hospital outpatient reasonable cost reimbursement through the year 2002; (3) a reduction in reimbursement for hospital outpatient department capital-related costs of 85% of such reasonable costs for federal fiscal years 1996-2002; (4) the introduction of a prospective payment system for home health services, effective October 1996; (5) reductions in payment for clinical laboratory services; (6) the elimination of updates in payments for ambulatory surgical center services from 1996-2002; (7) various other reductions in the amount of payment for physician and hospital services; and (8) the introduction of additional choices of health plans for Medicare beneficiaries in addition to the current fee-for-service and Medicare HMO option. Proposed Medicaid changes include the replacement of the existing federal/state program with block grants to the states and reduced federal oversight over state plans. The enactment of large cuts in the amount of Medicare and Medicaid reimbursement for providers could have an adverse effect on the Company's revenues. At this point in time, however, it is uncertain which, if any, of these or other changes to the Medicare and Medicaid programs will be enacted into law, and the Company is unable to predict how the enactment of any such changes might affect the Company in the future. The Company believes that the provision of health care will continue to evolve, that rules and regulations will continue to change and, therefore, regularly monitors developments. The Company may modify its agreements and operations from time to time as the business and regulatory environments change. While the Company believes it will be able to structure its agreements and operations in accordance with applicable law, there can be no assurance that its arrangements will be as successful or not be successfully challenged. Labor costs represent the largest dollar component of the Company's total expenses and necessary increases in the number of personnel, salaries, hourly rates and insurance costs have resulted in higher dollar amounts of operating expenses. Rental rates are subject to annual adjustments pursuant to escalation clauses in the respective leases. In addition, suppliers have sought to pass along their rising costs to the Company. A significant portion of these higher costs, however, has been offset by the use of new procedures and equipment, changes in staff scheduling, improvement in purchase price negotiations and utilization of supplies, and by increases in treatment and services volume. Changes in reimbursement rates for Medicare patients have a significant impact on the results of operations. The rate of inflation has not had a significant impact on the results of operations. 16 SALICK HEALTH CARE, INC. PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) On January 18, 1996, the Registrant held its Annual Meeting of Stockholders. (b) Proxies for the meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934, there was no solicitation in opposition to management's nominees as listed in the Proxy Statement and all of such nominees were elected. (c) At the Annual Meeting, a proposal to consider and approve amendments to the Company's certificate of incorporation to increase the authorized number of Directors from ten to twelve, six of whom would be elected by the holders of the Company's Common Stock and six of whom would be elected by the holders of the Company's Callable Puttable Common Stock was approved by 100% of the outstanding Common Stock (5,657,115 shares) voting separately as a class and by the following vote of the Callable Puttable Common Stock voting separately as a class and voting together with the Common Stock as a single class (there were no broker non- votes): Callable Puttable Common Stock: For Against Abstained ----------- ------- --------- 15,774,588 3,664 945 Callable Puttable Common Stock and Common Stock voting together as a class: For Against Abstained ----------- ------- --------- 10,736,555 3,664 945 17 SALICK HEALTH CARE, INC. PART II OTHER INFORMATION At the Meeting, the following persons were elected by the vote indicated (there were no abstentions or broker non-votes) to serve until the next annual meeting of stockholders and until their successors are duly elected and qualified: Elected by Holders of Callable Puttable Common Stock:
Vote Name For Withheld ---- ---------- -------- Bernard Salick, M.D. 21,415,004 21,308 Leslie F. Bell 21,415,004 21,308 Michael T. Fiore 21,415,004 21,308 Barbara Bromley-Williams 21,415,004 21,308 Thomas Mintz, M.D. 21,415,004 21,308 Patrick W. Jeffries 21,415,004 21,308
Elected by Holders of Common Stock:
Name For ---- --------- Dr. Thomas F. W. McKillop 5,657,115 Robert C. Black 5,657,115 John G. Goddard 5,657,115 Dr. Michael G. Carter 5,657,115 Alan I. H. Pink 5,657,115
Item 5. Other Information At the Board of Directors' meeting on January 18, 1996, Allen L. Johnson was elected as a Director of the Company to fill the vacancy on the Board of Directors to be elected by the holders of Common Stock. Since 1986 Mr. Allen has served as President and Chief Executive Officer of the Medical Center of Delaware. Previously, Mr. Allen was President and Chief Executive Officer of St. Vincent Medical Center in Toledo, Ohio. Mr. Allen has also held executive management positions with Farley Health Care Corporation and St. Vincent Corporate Services, Inc. in Toledo, Ohio and with Henry Ford Hospital Services Corporation and Henry Ford Hospital in Detroit, Michigan. 18 SALICK HEALTH CARE, INC. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 3(a) Certificate of Incorporation of Salick Health Care, Inc. Incorporated by reference to Annex B to the Proxy Statement Prospectus of the Company dated March 13, 1995 forming part of the Company's Registration Statement on Form S-4 dated March 13, 1995 - No. 33-58057. 3(b) Certificate of Amendment of Certificate of Incorporation of Salick Health Care, Inc. 10(a) Employment Agreement with Patrick W. Jeffries. 11 Computation of Net Earnings per Common Share. 27 Financial Data Schedule. (b) Reports on Form 8-K. During the quarter ended February 29, 1996 no reports on Form 8-K were filed. 19 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant had duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. SALICK HEALTH CARE, INC. ------------------------------------ (Registrant) /s/ BERNARD SALICK, M.D. ------------------------------------ Date: April 15, 1996 Bernard Salick, M.D. Chairman and Chief Executive Officer (Duly Authorized Officer) /s/ BLAIR L. HUNDAHL ------------------------------------ Date: April 15, 1996 Blair L. Hundahl Senior Vice President-Finance (Principal Accounting Officer) 20 SALICK HEALTH CARE, INC. EXHIBIT INDEX Exhibit ------- 3(b) Certificate of Amendment of Certificate of Incorporation of Salick Health Care, Inc. 10(a) Employment Agreement with Patrick W. Jeffries. 11 Computation of Net Earnings per Common Share. 27 Financial Data Schedule 21 EX-3.(B) 2 CERT. OF AMDMT. OF CERT. OF INCORP. EXHIBIT 3(b) SALICK HEALTH CARE, INC. CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF SALICK HEALTH CARE, INC. Salick Health Care, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify: The amendments set forth in the following resolutions approved by the Corporation's Board of Directors and stockholders were duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware: RESOLVED, that the first sentence of Section C(ii) of Article FOURTH of the Corporation's certificate of incorporation be amended to read as follows: "Notwithstanding the voting rights set forth in subsection (i) of this Section C of Article FOURTH of this Certificate of Incorporation, until the Termination Date, the holders of the Common Stock, voting separately as a class, shall be entitled to elect six (6) Directors to the Board and the holders of the Special Common Stock, voting separately as a class, shall be entitled to elect six (6) Directors to the Board." RESOLVED, FURTHER, that the second sentence of Section A of Article FIFTH of the Corporation's certificate of incorporation be amended to read as follows: "Subject to Article FOURTH hereof, the authorized number of Directors of the Corporation shall be twelve (12)." IN WITNESS WHEREOF, Salick Health Care, Inc. has caused this Certificate to be signed by its duly authorized officer this 18th day of January, 1996. SALICK HEALTH CARE, INC. By: /s/ Bernard Salick, M.D. ------------------------------ Bernard Salick, M.D., Chairman EXHIBIT 3(b) 22 EX-10.(A) 3 EMPLOYMENT AGREEMENT EXHIBIT 10(a) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") dated December 1, 1995 is between SALICK HEALTH CARE, INC., a Delaware corporation, hereinafter referred to as "Employer", and Patrick Jeffries, hereinafter referred to as "Employee". I. Employment and Compensation. A. Employer hereby employs Employee as its Executive Vice President, Chief Development Officer. Employee shall receive a base annual salary payable in bi- weekly installments, in advance, during the term hereof. Initially, Employee's base annual salary shall be $500,000 payable in bi-weekly installments of $19,230.77. For purposes of this Agreement, the base annual salary is hereinafter referred to as the "Base Annual Salary." B. Base Annual Salary shall be increased at least annually during the term hereof by an amount at least equal to the annual increase in the All Urban Consumers Los Angeles-Long Beach-Anaheim consumer price index, as applicable each year for the same month as the month in which the term hereof begins. If the above-described index is discontinued, a comparable index shall be used. Notwithstanding the use of the index, in no event shall the Base Annual Salary of Employee be subject to downward modification. For purposes of calculating increases to Base Annual Salary, the formula shall apply to the amount payable pursuant to Paragraph I.A. C. In addition to the above, Employee shall continue to be a participant in Employer's Management Incentive Compensation Plan. D. At the first Board of Directors meeting after the execution date hereof and during the term of this Agreement, Employer shall nominate Employee to serve as a director of Employer, and use its best efforts to cause his election. II. Duties and Authority. A. Subject to the provisions of Paragraph II.D, and consistent with Employee's practice prior to the date hereof, Employee shall devote such of his working time as is necessary to the discharge of his duties for Employer. B. Employee shall have such duties and authority as shall be determined from time to time by Employer's Board of Directors or its designee, consistent with Employee's duties and authority and shall report to the Chief Executive Officer and the Employer's Board of Directors as a whole. C. As a result of the transactions contemplated by the Merger Agreement dated as of December 22, 1994 among Employer, the Acquiring Company and Atkemix Thirty-Nine Inc. (the "Merger Agreement") and pursuant to the Governance Agreement, all employees of Employer will be bound by Employer's Employee Handbook, Employer's Personnel Policy & Procedure Manual and the Policy on the Ethical Conduct of Business faxed to Employee on December 19, 1994 (collectively, the "Code of Conduct"). Employee acknowledges that he has read and agrees to be bound by the Code of Conduct; provided that, to the 23 extent the Code of Conduct conflicts with the express provisions of Section VII of this Agreement, the provisions of Section VII shall govern. D. Notwithstanding anything to the contrary in this Agreement or the Code of Conduct, Employer acknowledges that Employee devotes a portion of his time to (i) serving as Executor or Co-Executor, Trustee or Co-Trustee for the estates and/or trusts of two unrelated individuals, (ii) serving as a director or advisor of charitable research or educational foundations, (iii) engaging in certain real estate activities, (iv) investments in four privately held businesses, (v) providing occasional counsel to former consulting clients, and (vi) engaging in philanthropic activities including without limitation, in respect of charitable foundations (collectively, the "Outside Activities"). The Outside Activities are deemed and acknowledged not to be competitive with the business of Employer or violative of Paragraphs XI.A(iv) or (v) of this Agreement. Employee may maintain his level of involvement in his Outside Activities and shall not be accountable to Employer in any way for his Outside Activities. In addition, Employee may engage in other business and philanthropic activities in the future provided that they are not competitive with the business of Employer. E. Employer and Employee acknowledge and confirm that the position conferred on Employee pursuant to Paragraph I.A on the Commencement Date (the "New Position") is substantially the same as the position discussed and negotiated immediately prior to the Commencement Date (the "Negotiated Position") and that when the New Position is compared to the Negotiated Position, there is (i) no reduction in total compensation and benefits, (ii) no significant change in the nature or scope of Employee's authority, duties or status, and (iii) no significant change in circumstances that affect his position, the duties attached to his position or his ability to exercise the authority, powers, functions, or duties attached thereto, such as would give rise to an event of "Good Reason" as defined in Paragraph XI.B. Such acknowledgment by Employee does not waive his right to take action pursuant to Paragraph XI.B with respect to changes in the New Position which arise after the Commencement Date. III. Benefit Plans. A. All Employer benefits presently available to Employee as listed on Exhibit "A" shall continue to be available to Employee, on the same basis as they are currently available, throughout the term of this Agreement. Any other benefits (whether under a plan or otherwise) provided by Employer in the future for key executives shall also be made available to Employee, and shall be deemed incorporated into Exhibit A hereto. B. If the Acquiring Company (as defined in Paragraph IV), acquires all shares of Employee's common stock, it may, at its option, offer a package of benefit programs to Employee. If the Acquiring Company makes such an offer, Employee may choose to be entitled to either, but not both, Employer's or the Acquiring Company's package of benefits (in the latter case, all of Employee's years of service with Employer shall be included in calculating years of employment for purposes of eligibility and benefit participation in such programs). 24 IV. Term. The term of this Agreement is through April 13, 2000, commencing upon the date hereof (the "Commencement Date"). Employer shall, not less than eighteen months prior to the expiration of the employment term, notify Employee if Employer intends to retain Employee following the expiration of the then current term, in which event the parties shall enter into good faith negotiations with regard to the terms of such continued employment. V. Vacation and Sick Leave. Employee shall be entitled to six weeks vacation every year during the term of this Agreement, with up to a maximum of six weeks of unused vacation time being carried forward during the term hereof. Employee shall be entitled annually during the term of this Agreement to sick days equal to the number of days of the waiting period for the earliest period of eligibility under any Employer disability plan. Sick days not taken during the calendar year shall be forfeited. VI. Death and Disability. If Employee shall die during the term hereof or should he become so ill that he is unable to substantially perform his duties hereunder and should such illness continue for a period of six (6) consecutive months during the term hereof, then Employer may, at its option, terminate this Agreement subject to the following: (1) in the event of death, all Compensation shall continue to be paid to Employee's surviving spouse and in the absence of a surviving spouse, Employee's heirs for twenty four (24) additional months; (2) in the event of permanent disability, Employee's Compensation shall be paid for the first twelve (12) months of such disability, sixty-six percent (66%) thereof shall be paid during the succeeding six (6) month period and thirty-three percent (33%) thereof shall be paid during the second succeeding six (6) month period. All payments due Employee hereunder shall be accrued and paid at, as and when due. Disability shall only give rise to Employer's option to terminate hereunder if a physician selected by Employer, and reasonably acceptable to Employee or his legal representative has determined that such disability is total and permanent. For purposes of this Paragraph VI, "Compensation" shall mean the amounts described in paragraphs I.A and I.C and the Items set forth in Exhibit "A". VII. Expenses of Employee. A. Employee shall receive reimbursement for all business expenses incurred by him during the term hereof (including the cost of first class travel, lodging and related expenses) for which he shall account in accordance with the regular and standard practices maintained by Employer in that regard. B. In addition, during the term hereof, Employer shall directly pay or reimburse Employee for professional publications, professional society dues, professional licensing fees (including but not limited to continuing education requirements required for license maintenance), conventions, lectures and seminars (including but not limited to fees, first class travel, lodging and related expenses), and similar expenses, all consistent with 25 prior practice. Such expenses have averaged less than $12,500 per year during the past three years. VIII. Insurance. In addition to the insurance benefits listed in Exhibit "A", Employer shall, during the term hereof, provide Employee, at no cost to Employee, with general and professional liability and malpractice insurance coverage (as an officer) to be not less than the amount currently in existence for other like officers. To the extent available at a reasonable cost (e.g. market rates), Employer shall procure and maintain a policy of officers' and directors' insurance in a mutually acceptable amount (not less than at present) with Employee as a named insured thereunder. Further, Employer shall cause Employee to be added as a named insured under all of its other liability policies, to the extent such addition is permitted by the insurer in respect of such policies. IX. Employee and Employer Representations. Employee warrants and represents that he is legally able to and authorized to make and enter into this Agreement and that the execution hereof is in no way in breach or violation of any agreement to which Employee is a party. Employer represents and warrants that (a) this Agreement and all acts contemplated hereunder will have been duly authorized by Employer and approved by a majority of the disinterested directors of Employer following thorough review and discussion of the terms hereof; (b) this Agreement is fully binding upon Employer; and (c) this Agreement does not violate any of the organizational or governing documents of Employer. X. Covenants. A. At any and all times, both during employment by Employer and after termination thereof, Employee will, promptly upon request of Employer, do all acts and execute, acknowledge and deliver all written instruments as may be necessary to vest in Employer, its affiliates or successors, the entire right, title, and interest of Employee to any patentable inventions made by Employee either solely or jointly with any other person or persons, at any time during the period of employment by Employer, while working on Employer's business ("Inventions"), and to enable it (at Employer's sole cost and expense) properly to prepare, file, and prosecute applications for, and to obtain, Letters Patent thereon in any and all countries selected by Employer, its affiliates or successors, as well as reissues, renewals and extensions thereof, and to obtain the record title to such applications and Letters Patent, so that Employer, its affiliates or successor shall be the sole and absolute owner thereof to the extent of Employee's interest. Employee will cooperate with Employer, to include its affiliates and successors, and its counsel in the prosecution and defense, or either, of any litigation which may arise in connection with any of the Inventions, provided, however, that any requested cooperation shall be reasonable in amount, shall not interfere with other obligations of Employee and shall be provided in Los Angeles, California. Should such services be rendered after the termination of employment with Employer, a reasonable compensation shall be paid to Employee on a per diem basis, based on the Base Annual Salary which Employee was receiving from Employer at the termination of employment, in addition to 26 first class travel and personal expenses incurred by Employee in rendering the services. B. Employee and Employer acknowledge that the terms and conditions of this Agreement are confidential and may be disclosed, in the case of Employee, only to family members, attorneys, accountants and as required by law and, in the case of Employer, only to members of the Boards of Directors of Employer and the Acquiring Company, attorneys, accountants and employees of Employer and the Acquiring Company on a "need to know" basis. C. At any and all times, Employee agrees not to, except to the extent required to properly perform Employee's duties as an officer of Employer in the ordinary course of business, directly or indirectly, disclose or communicate any trade secrets (as defined in Section 3426.1 of the California Civil Code) of Employer or its subsidiaries or the Zeneca Group or relating to the "Business" of Employer or the Zeneca Group; provided, however, that the foregoing shall not apply to information which is not unique to Employer or its subsidiaries or the Zeneca Group or which is generally known to the industry or the public other than as a result of Employee's breach of this covenant. The term "Business" shall have the meaning set forth in "Core Business" in Section 1.1 of the Governance Agreement. D. Any "Written Matter" prepared by Employee during employment by Employer, whether during working hours or at any other time, for use by Employer or related to the actual or contemplated operations of Employer at the time the matter is prepared shall be considered a work made for hire, and the copyright in such Written Matter shall belong exclusively to Employer, its affiliates and successors, or any member of the Zeneca Group. Employer, its affiliates and successors, or any member of the Zeneca Group shall further have the unlimited right to use, copy, reproduce, publish or otherwise disseminate any such Written Matter. At any and all times, both during employment by Employer or after termination thereof, Employee will promptly on request of Employer do all things as may be necessary to vest in Employer, its affiliates or successors, or any member of the Zeneca Group, the entire right, title, and interest to the copyright in any such Written Matter; provided, however, that any requested cooperation shall be reasonable in amount, not interfere with other obligations of Employee and shall be provided in Los Angeles, California. Should such services be rendered after the termination of employment with Employer, a reasonable compensation shall be paid to Employee on a per diem basis, based on the Base Annual Salary which Employee was receiving from Employer at the termination of employment, in addition to first class travel and personal expenses incurred by Employee in rendering the services. All rights being conferred hereunder by Employee relate only to the extent of ownership of such right by Employee. The term "Written Matter" shall include practice guidelines, managed care standard operating procedures, marketing literature and brochures, journal articles or other publications and data acquisition proformas and quality satisfaction instruments. E. Upon termination of employment, Employee shall deliver to Employer all writings, records, data, memoranda, contracts, orders, sales literature, price lists, customer lists, data processing materials, manufacturing and production materials, and other documents, whether or not obtained from Employer, which pertain to or were used by Employee in connection with 27 employment by Employer (but Employee may keep any of his personal writings, documents and personal possessions). XI. Termination. A. Other than as provided in Paragraph VI, this Agreement may be terminated by Employer only for "Good Cause." Good Cause shall mean and be deemed to exist only if: (i) (x) a final court judgment has been entered that Employee has been convicted of a felony, or (y) Employee has engaged in intentional acts of fraud; (ii) Employee has misappropriated Employer funds; (iii) Employee engages in "repeated willful misconduct" (as defined in Paragraph XIII.B), or a single act of wanton and egregious misconduct (e.g. embezzlement); (iv) Employee obtains a material personal benefit from a transaction with Employer in which Employee has an interest which is adverse to the interest of Employer, unless Employee shall have first obtained the consent of Employer's Board of Directors; (v) Employee engages in any other business, profession or occupation which is competitive with the business of Employer after being notified by the Board of Directors to cease engaging in such other business, profession or occupation; or (vi) there is a breach by Employee of a covenant set forth in Paragraph X. In addition, consistent with the treatment of all employees of Employer, any violation of the Code of Conduct is grounds for appropriate disciplinary action, up to and including dismissal for "Good Cause". Disciplinary action, if any, will suit the nature of the infraction. Notwithstanding anything to the contrary set forth in this Paragraph XI.A., (a) the conduct set forth in Paragraph II.D., (b) any pending or presently threatened investigation, claim, action, suit or proceeding, whether civil, criminal, administrative or investigative, with respect to which Employee has actual knowledge and has specifically disclosed to the Acquiring Company in the disclosure schedule faxed to Employer on December 20, 1994 (the "Disclosure Schedule"), and (c) any other action which is inadvertent or based upon a reasonable or good faith mistake or de minimis, shall not, at any time, constitute Good Cause for termination. B. This Agreement may be terminated by Employee only for "Good Reason." Good reason shall mean and be deemed to exist if: (i) there is a reduction in Employee's Base Annual Salary; (ii) Employer changes the principal offices of Employer (presently located at 8201 Beverly Boulevard, Los Angeles), unless relocated to substantially similar size and quality facilities in West Los Angeles, Beverly Hills, or Santa Monica, California (Employer acknowledges and agrees that (a) Employee 28 may perform services from his home and locations other than Employer's principal office and (b) Employee will not be required to perform any services at any other location, except in connection with ordinary business travel of the type engaged in the past, without his consent); (iii) If, as the result of an action of Employer's Board of Directors initiated and supported by the members of the Board designated by the Acquiring Company and any of its affiliates ("Zeneca Initiated"), Employer reduces Employer's employees or employee working hours by at least 30% and such action is not caused by a significant decline in the economic performance of Employer; (iv) There is a material adverse change in the operations, policies, funding, procedures, practices, or professionalism relating to the overall quality of patient care by Employer that is inconsistent with Employer's past or existing practices; (v) The name of Employer is changed to not include the name "Salick" therein; (vi) There is (a) a reduction in Employee's benefits as set forth in Exhibit A (provided Employer may substitute different benefits so long as they are not significantly different from Employee's current benefits and so long as Employee's years of service with Employer are included in calculating years of employment for purposes of eligibility and benefit participation in such different benefits), or (b) a change in the calculation for Employee's bonus pursuant to Employer's Management Incentive Compensation Plan (provided Employer may substitute a new bonus plan, so long as the new bonus plan does not significantly affect the accounting method for or calculation of the bonus); (vii) There is a reasonable determination by Employee that, as a result of any Salick, Zeneca or Board-level initiated change that significantly adversely affects Employee's position (including a change in his title, status or position as director), Employee is unable to exercise the nature or scope of his authority, duties, powers, or functions that Employee agreed to as described in Exhibit "B" at the time of Execution of this Agreement; (viii) Employer has breached this Agreement; or (ix) If there is a Change in Control of Employer, as defined in Paragraph XV, during the period ending October 13, 1998. C. Notwithstanding anything herein to the contrary, if either party claims a breach or default hereunder by the other party or a right to terminate hereunder or Employer claims a violation of the Code of Conduct (whether for purposes of termination pursuant to Paragraph XI or otherwise), the party claiming such breach, violation or right to terminate shall first give written notice specifying the nature of the alleged breach, violation or cause for termination to the other party, and that party shall have 10 business days after receipt of notice to cure a monetary breach, if curable, and 30 days after receipt of notice to cure a nonmonetary breach, if curable, provided, however, that if the alleged nonmonetary breach cannot be cured within 30 days and the party makes reasonable efforts to cure such alleged 29 breach, the time shall be extended as necessary to complete the cure. D. Employer hereby agrees that, notwithstanding anything to the contrary set forth herein, if Employee terminates employment with Employer for Good Reason, such termination shall not be deemed to be or constitute a breach or default of or under this Agreement by Employee. XII. Severance Pay. If any of the matters hereinafter set forth occur (and with all capitalized terms, unless otherwise defined, having the meaning therefore set forth in Paragraph XV), the following provisions are applicable and supersede the amounts owed but not paid set forth in Paragraphs I, III, V and VII. A. Entitlement to Severance Pay. If at any time during the term of this Agreement, (a) Employee's employment with Employer is terminated by Employer for any reason other than Good Cause, or (b) Employee terminates employment with Employer for Good Reason, then, in such event, Employer, within a period of thirty (30) days, shall pay to Employee an amount equal to 299% of Employee's Base Salary ("Severance Pay"); Provided, however, that if Employee would, except for this provision, be subject to a tax pursuant to Section 4999 of the Code or any successor provision that may be in effect, as a result of a "parachute payment" (as that term is defined in Section 28OG of the Code) being made pursuant to this Agreement, or a deduction would not be allowed to Employer for all or any part of such payment by reason of Section 28OG of the Code, or any successor provision that may be in effect, then there shall be deducted from the amounts payable hereunder such amounts ("Excess Payment") as are required to reduce the aggregate "present value" (as that term is defined in Section 280G of the Code) of such payment to 299% of an amount equal to Employee's "base amount" (as that term is defined in Section 280G of the Code), to the end that Employee is not subject to tax pursuant to such Section 4999 and no deduction is disallowed by reason of such Section 280G. The entire amount payable hereunder shall be paid to Employee in one lump sum payment within 30 days following the date of termination of employment as provided in this Paragraph XII.A. If after payment is made pursuant to this Paragraph XII.A, it is determined by the Internal Revenue Service (or any court to which the determination is appealed) that, notwithstanding the foregoing provision in the first sentence of this Paragraph, the aggregate "present value" (as that term is defined in Section 280G of the Code) of the payment made to Employee pursuant to this Paragraph XII equalled or exceeded three times of an amount equal to Employee's "base amount" (as that term is defined in Section 280G of the Code) so that Employee is subject to tax pursuant to Section 4999 or a deduction will not be allowed to Employer by reason of Section 280G, Employee shall, within 30 days thereafter reimburse Employer for that portion of the payment equal to the amount of such excess plus $1.00. B. Termination for Good Cause or Without Good Reason. If Employee's employment with Employer is terminated by Employer for Good Cause, or by voluntary action by Employee without Good Reason, Employer shall have no obligation to Employee under Paragraph XII.A hereof. C. Benefits Unfunded. Except as provided in Paragraph XII.A, all of Employee's rights under Paragraph XII.A shall at all times be entirely 30 unfunded and no provision shall at any time be made with respect to segregating any assets of Employer for payment of any amounts due hereunder and Employee shall have no interest in or rights against any specific assets of Employer and Employee shall have only the rights of a general creditor of Employer. XIII. Indemnification. A. Pre Commencement Date Indemnifiable Litigation. With respect to Indemnifiable Litigation (as defined below) which arises in connection with actions taken or omitted to be taken prior to the Commencement Date, Employer shall hold harmless, indemnify, and defend Employee against all claims, damages, expenses, liabilities and losses (including, without limitation, attorneys' fees, judgments, fines, taxes or penalties and amounts paid or be paid in any settlement with the approval of Employer, which approval shall not be unreasonably withheld) (collectively, "Indemnifiable Expenses") incurred or suffered by Employee in connection with any present or future threatened, pending or contemplated investigation, claim, action, suit or proceeding, whether civil, criminal, administrative or investigative (collectively, "Indemnifiable Litigation"), (i) to which Employee is a party or is threatened to be made a party by reason of conduct of Employee in any manner related to his service as an officer, director, employee, or agent of Employer; or (ii) based in whole or in part on or arising in whole or part out of the fact that Employee is or was a director, officer, employee or agent of Employer or any subsidiary affiliate thereof, or is or was serving at the request of Employer as a director, officer, employee or agent of another corporation. Notwithstanding the foregoing, for the purposes of this Paragraph XIII.A., Indemnifiable Litigation shall not include pending or presently threatened investigations, claims, actions, suits or proceedings, whether civil, criminal, administrative or investigative, with respect to which Employee has actual knowledge and has failed to specifically disclose in the Disclosure Schedule. B. Post Commencement Date Indemnifiable Litigation. With respect to any Indemnifiable Litigation which arises in connection with actions taken or omitted to be taken after the Commencement Date, Employer shall hold harmless, indemnify, and defend Employee against all Indemnifiable Expenses incurred or suffered by Employee in connection with any such Indemnifiable Litigation (i) to which Employee is a party or is threatened to be made a party by reason of conduct of Employee in any manner related to his service as an officer, director, employee or agent of Employee, (ii) based in whole or in part on or arising in whole or in part out of the fact that Employee is or was a director, officer, employee or agent of Employer or any subsidiary or affiliate thereof, or is or was serving at the request of Employer as a director, officer, employee or agent of another corporation, or (iii) which Employee may incur in connection with any audit, appeal, court, or other governmental proceeding involving Employee's or Employer's tax returns (collectively, "Audit") in which a matter under contest is the applicability or amount of tax pursuant to Section 4999 of the Code on account of the payment of any Severance Pay pursuant to Paragraph XII.A hereof. Notwithstanding the foregoing, for the purposes of this Paragraph XIII.B., (x) Indemnifiable Litigation shall not include threatened or pending investigations, claims, actions, suits or proceedings, whether civil, criminal, administrative or investigative which arise as a result of 31 Employee's "repeated willful misconduct" (as described below) or a single act of wanton and egregious misconduct (e.g. embezzlement) on the part of Employee, which, in either case, is engaged in after the Commencement Date, and (y) Indemnifiable Expenses shall not include any costs and expenses incurred in an audit in connection with a matter other than the matter described in clause (iii) above and, if other matters are involved in an Audit of the matter described in clause (iii), an equitable apportionment as to the payment of the costs and expenses as between Employee and Employer shall be made. For purposes of this Paragraph XIII.B, Employee shall have engaged in "repeated willful misconduct" if, following an initial act of willful misconduct and the receipt of a written warning from Employer, Employee engages in the same or a similar act of misconduct. C. Procedures. Employer shall pay Indemnifiable Expenses incurred by Employee in connection with any Indemnifiable Litigation as incurred and in advance of the final disposition thereof, it being understood that attorneys' fees of Employee in connection with Indemnifiable Litigation will be so paid as incurred, subject to reimbursement by Employee to Employer if same are ultimately determined not to constitute Indemnifiable Expenses. If Employer acknowledges, in writing, that a particular claim asserted is subject to its obligation to indemnify Employee, without reservation of rights, and agrees to, and does, pay the costs and fees (including attorneys' fees) incurred in the defense of the claim and agrees in writing to pay all Indemnifiable Expenses in connection with such claim, subject to the provisions of any insurance policy which covers such claim, the Acquiring Company's Board of Director nominees shall have the right to select counsel for Employee, control the litigation and assume the defense, and may settle or compromise such claim on behalf of Employee; provided that such right to settle or compromise such claim shall require the consent of Employee only if (i) Employee would be compelled or required to admit to guilt or responsibility or to the truth of any material, significant, injurious or charging allegations, (ii) Employee would be compelled or required to contribute to such settlement or compromise, or (iii) any such settlement or compromise does not involve the settlement and general release of any and all claims of claimant against or involving Employee (whether or not included in the proceeding). Any order or judgment related to any claim shall be paid and satisfied by Employer prior to any levy, distraint or execution against Employee without any right of subrogation. If Employee provides to Employer written notice of his desire to accept a settlement offer made by the party asserting claims against Employee, and Employer does not approve the settlement, Employee shall have the right, but not the obligation, to accept the settlement, and Employer shall pay the full amount of the settlement, less only such portion of the settlement amount that Employer contests and provides the written reasons why it is not obligated to pay such portion in settlement. Employee shall have the right to commence an action against Employer to reimburse Employee for that portion of the settlement that is reasonably allocable to claims which Employer is obligated to indemnify hereunder. Employee shall promptly give notice to Employer after Employee has knowledge that any legal proceeding has been instituted or any claim or other matter has been asserted in respect of which indemnification may be sought hereunder, provided that failure to give such notice shall not preclude indemnification except to the extent of actual 32 prejudice directly caused by such failure. If Employer, within a reasonable period of time after receipt of notice of a claim, fails to assume the defense (including the retention of legal counsel), Employee shall have the right to undertake the defense, compromise, or settlement on behalf of and for the account and risk of Employer. If Employee is required to bring any action to enforce his rights pursuant to this Paragraph, if Employee prevails, Employee shall also be entitled to be paid all expenses (including attorneys' fees), in bringing such action. Employer shall not amend its Certificate of Incorporation or bylaws in any way that adversely affects Employee's rights under this Paragraph XIII. This Paragraph XIII shall not apply to any action which involves only claims between the parties and which is otherwise provided for pursuant to Paragraph XVI.J. D. Conflicts of Interest. Notwithstanding anything set forth above, if (x) the use of counsel selected by Employer pursuant to Paragraph XIII.C would present such counsel a conflict of interest or (y) Employer and Employee shall have reasonably concluded that there may be legal defenses available to Employee or other employees which are inconsistent with or in conflict with those available to Employer (collectively, "Conflicts"), Employee shall have the right to select, subject to Employer's consent (which consent shall not be unreasonably withheld), and employ separate counsel (at the Employer's expense) to represent Employee and, solely to the extent required to mitigate the Conflict, Employer shall not have the right to control the Indemnifiable Litigation on behalf of Employee. The existence of a Conflict shall not affect Employer's right to settle or compromise a claim in accordance with the provisions of Paragraph XIII.C. For purposes of this Paragraph XIII.D, the parties acknowledge and agree that, with respect to matters set forth in the Disclosure Schedule, there was no Conflict at the time counsel was selected, there has been no conflict to date and, based upon the facts available to the parties to date, the parties do not anticipate a future Conflict. Employer shall bear the cost of independent counsel up to a maximum of $100,000 in the aggregate (which $100,000 shall include any amounts paid by Employer in connection with independent counsel retained for Dr. Salick's defense and shall be divided between Dr. Salick and Employer as Dr. Salick and Employer shall agree) for defense costs incurred after the Commencement Date with respect to the matter referred to in Item 1 of the Disclosure Schedule. In addition, Employee may, at his own expense, retain independent counsel to act in an advisory capacity as to all other matters. Employer shall cause the counsel which it has selected to consult with Employee's counsel in good faith with respect to all significant aspects of a claim. XIV. Covenant Not to Compete. Employee agrees that during the term hereof, and if his employment is terminated pursuant to Paragraph XI.A by Employer or other than pursuant to Paragraph XI.B by Employee, the provisions of the Covenant Not to Compete attached hereto as Exhibit B shall be effective for the term set forth therein; provided, however, that if Employee terminates his employment pursuant to Paragraph XI.B(vii) on or before October 13, 1997, the provisions of the Covenant Not to Compete shall also be effective. XV. Definitions. 33 A. For purposes of Paragraph XI.B, "Affiliate" shall have the meaning set forth in the Securities Exchange Act of 1934. B. For purposes of Paragraph XII, "Base Salary" shall mean the amounts described in paragraphs I.A and I.C and the Items set forth in Exhibit "A"; such annualized includable compensation for such period to be determined in accordance with Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). C. For purposes of Paragraph XI.B, a "Change in Control" shall mean and be deemed to have occurred in connection with any of the following events: (i) The acquisition, other than from Bernard Salick, M.D., by an entity, person or group (including all Affiliates of such entity, person or group, but excluding the Acquiring Company or affiliates thereof, Bernard Salick, M.D., Leslie F. Bell or the Family Members of any of the foregoing, and trusts for the benefit of any of the foregoing described persons or Family Members or any entity operated, managed or in substantial part owned by any of them) of beneficial ownership, as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, of capital stock of Employer: (a) entitled to exercise 30% or more of the outstanding voting power of all capital stock of Employer ("Voting Stock"), or (b) equal to 30% or more of the outstanding Capital Stock of Employer; or (ii) The commencement by any entity, person, group (including any Affiliates of such entity, person or group, but excluding Employer or an Affiliate of Employer or any entity owned by any of them) of a tender offer or an exchange offer for more than 30% of the outstanding Capital Stock irrespective of voting rights; or (iii) (A) a merger or consolidation of Employer, other than as approved by Bernard Salick, M.D., with one or more other corporations as a result of which the holders of the outstanding Voting Stock immediately prior to such merger or consolidation (other than the surviving or resulting corporation or any Affiliate thereof) hold 70% or less of the Capital Stock of the surviving or resulting corporation, or (B) a transfer, other than by Bernard Salick, M.D., of a majority of the Capital Stock (excluding transfers to Bernard Salick, M.D., Leslie F. Bell or the Family Members of any of the foregoing, and trusts for the benefit of any of the foregoing described persons or Family Members or any entity operated, managed or in substantial part owned by any of them), or of a Substantial Portion of the Property, of Employer other than to an entity of which Employer owns at least 70% of the Capital Stock. D. For purposes of Paragraph XV.C, "Family Members" shall mean Employee's spouse, ancestors, lineal descendants, siblings and their descendants, aunts and uncles, mother-in-law, father-in-law, sons-in-law, daughters-in-law, brothers- in-law, sisters-in-law and first cousins; and a child legally adopted by Employee shall be treated as your child by blood. E. For purposes of Paragraph XV.C, "Substantial Portion of the Property of Employer" shall mean 50% or more of the aggregate book value of the assets of Employer as set forth on the most recent balance sheet of Employer, prepared on a consolidated basis, by its regularly employed accountants. 34 XVI. Miscellaneous. A. Entire Agreement. This is the entire agreement of the parties relating to the subject matter set forth herein. Except as specifically set forth in this Agreement, or in other agreements related to or entered into at the time of the Merger Agreement, there are no other understandings or agreements concerning the subject matter hereof between the parties which have been relied upon or which shall survive the execution hereof. This Agreement supersedes any and all other agreements or understandings, oral or written, between the parties concerning the subject matter set forth herein, including, without limitation, the prior Employment Agreement of Employee, as amended, except as to accrued but unpaid rights; provided that in the event the transactions contemplated by the Merger Agreement are not consummated, this Agreement shall terminate. B. Modification. This Agreement may not be modified or varied in any way, except by a subsequent writing signed by each of the parties hereto. C. Assignment. This Agreement is binding on and inures to the benefit of the parties hereto and their respective heirs, successors, or assigns. This Agreement may not be assigned by either party, except that, in the event Employer is adjudicated bankrupt, Employer may assign this Agreement to another member of the Zeneca Group with the prior written consent of Employee. D. Gender and Number. As used herein, where the context so indicates, reference to one gender includes the other and the neuter and vice versa, if applicable under the circumstances. When the context so indicates that such is the intent, words in the singular include the plural and vice versa. E. Invalidity and Severability. In the event any provision herein (or any portion of any provision) contained shall be declared by a court of competent jurisdiction to be invalid, that provision shall be limited to the extent necessary to make it enforceable, and, if necessary, severed from the Agreement. Notwithstanding the unenforceable provision, the remaining provisions (or portions of any provision), hereof shall be deemed severable therefrom and remain in full force and effect. F. Governing Law; Jurisdiction and Venue. This Agreement and any dispute or claims arising hereunder shall be governed by, and construed according to, and enforced under the laws of the State of California, without regard to the conflict of laws provisions of California law. The State and Federal courts located in Los Angeles, California shall be the sole forum for any action for relief arising out of or pursuant to, or to enforce or interpret this Agreement. Each party to this Agreement consents to the personal jurisdiction in such forum and courts and each party hereto waives any right to seek a transfer of venue from such jurisdiction on any grounds. It is the specific intent of the parties that no part of this Agreement be construed in accordance with or governed by the laws of any other country. G. Notices. Any notice or demand hereunder shall be given in writing to each person at the addresses set forth below by personal service or 35 registered or certified mail, postage prepaid, return receipt requested, or overnight courier: To Employer at: 8201 Beverly Blvd. Los Angeles, CA 90048-4520 Attn: Chief Financial Officer To Employee at: 8201 Beverly Blvd. Los Angeles, CA 90048-4520 and 1170 Embury Street Pacific Palisades, CA 90272 With copies to: Leslie F. Bell, Esq. 704 North Oakhurst Drive Beverly Hills, CA 90210 Such addresses may be changed by notice to the other party given as above provided. Notices so given shall be deemed given upon receipt. H. Waiver. No waiver of any default or breach shall be implied from any failure to take action on account of such default. No express written waiver shall be deemed to waive or render unnecessary the consent or approval to or of any subsequent act. I. Captions. Section captions used in this Agreement are descriptive and for convenience only, and shall not affect the construction of this Agreement. J. Attorneys' Fees. In any proceeding or any action at law or in equity commenced hereunder, the prevailing party shall receive its attorneys' fees, costs and disbursements in addition to any other relief granted. Each party may be represented by counsel of its choice, even though such counsel may have represented the other party in matters related to the business of Employer. K. No Mitigation. Without limiting any other provision hereof, any compensation and other benefits received by Employee from any and all sources other than Employer before or after the expiration or termination of this Agreement for any reason whatever shall in no way reduce or effect Employer's obligation to make payments hereunder. L. Independent Counsel: Interpretation. Each of the parties hereto has been represented by independent counsel in the negotiation and review of this Agreement. The provisions of this Agreement were negotiated by each of the parties hereto and this Agreement shall be deemed to have been drafted by each party. 36 M. Survival. The provisions of Paragraphs X, XII, XIII, XIV and XVI.F, G, J and K shall survive any termination of this Agreement. N. Reimbursement for Negotiation. Employer shall reimburse Employee for all professional fees and costs incurred by Employee in the drafting and negotiation of this Agreement and any amendments or extensions hereto and any other agreements related to or entered into at the time of the Merger Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective the day and year first above written. EMPLOYER: Salick Health Care, Inc., a Delaware corporation By /s/ Leslie F. Bell ___________________________ Its Duly Authorized Officer EMPLOYEE: /s/ Patrick W. Jeffries ______________________________ 37 EXHIBIT A BENEFIT PLANS OF EMPLOYER IN EFFECT AS OF DECEMBER 1, 1995 1. Participation in Employer's Management Incentive Compensation Plan. 2. Participation in Employer's long-term management incentive compensation plans intended to reward key managers which are currently being reviewed to be revised to establish Management incentives for substantial growth, value enhancement and performance improvement of the Employer. 3. Participation in Employer's Life Insurance policy. 4. The Salick Health Care, Inc. Salary Savings Plan (401(k) Plan), to which Employer makes a percentage matching contribution. 5. Participation in Employer's medical, dental, visual and psychiatric/ psychological insurance policies by Employee and immediate family. 6. Disability and accidental death and dismemberment rights and insurance. 7. Use of company automobile of Employee's choice, selected every three years, consistent with that currently being provided to Messrs Bell and Fiore, including gas, maintenance, car telephone, and insurance, and licensing. Employee may, at his option, acquire the company car that Employee is using for the greater of 7.5% of the original cost or book value (and Employer will then provide a replacement car). 38 EXHIBIT B Agreement Not to Compete ------------------------ This Agreement Not to Compete ("Agreement"), dated as of December 1, 1995, is made, entered into and executed by and between Zeneca Limited, an English company ("Zeneca"), Patrick W. Jeffries (for ease of reference herafter the "Stockholder"), and Salick Health Care, Inc., a Delaware corporation (the "Company"). WHEREAS, this Agreement is only effective if triggered by Paragraph XIV of the Employment Agreement of even date between Stockholder and Salick Health Care, Inc. (the "Employment Agreement"). WHEREAS, for good and valuable consideration, the receipt of which is expressly acknowledged, the Stockholder agrees to undertake the covenants with the Company and Zeneca not to compete with the business of the Company on the terms herein specified. WHEREAS, the Stockholder recognized and acknowledges that this Agreement Not to Compete is integral to the entering into and executing of the Employment Agreement. WHEREAS, but for this Agreement Not to Compete the Company would not make, execute or enter into the Employment Agreement of even date between the Company and Stockholder. 39 Capitalized terms used but not defined herein have the respective meanings attached thereto in the Merger Agreement. Now, therefore, the parties hereto agree as follows: 1. Covenant. During the Non-Compete Period, as hereinafter defined, -------- and within the Non-Compete Geographic Limits, as hereinafter defined, the Stockholder agrees, except for those activities permitted pursuant to Paragraph II.B of the Employment Agreement, not to be employed by, be an officer, agent, or director of, or consult with or directly or indirectly own, manage, participate in, operate or control, any interest in any business which competes with the business of the Company or any of its Subsidiaries, as such business is defined below (the "Business"); provided that the foregoing shall not prevent the Stockholder from making and holding investments of up to 5% of the equity of any entity engaged in such Business, if such equity is listed on a national securities exchange or regularly traded in the over-the-counter market. The Non-Compete Period shall be a period commencing on the date it is triggered pursuant to the Employment Agreement and ending on October 13, 1997. 40 The Non-Compete Geographic Limits are defined as the counties listed on Schedule A hereto. With respect to each listed county in the State of California set forth above, this covenant not to compete is intended as a separate covenant. If any one of such covenants is declared invalid for any reason, this determination shall not affect the validity of the remainder of the covenants or any covenant covering territory other than the State of California. The other covenants in the non-competiton provision shall remain in effect as if the provision had been executed without the invalid covenants. The parties hereby declare that they intend that the remaining covenants of the provision continue to be effective without any covenants that have been declared invalid. The term "Business" shall have the meaning set forth in Section 1.1 ("Core Business") of the governance Agreement dated December 22, 1994. 2. Solicitation of Employees. During the Non-Compete Period and within ------------------------- the Non-Compete Geographic Limits, the Stockholder shall not, without the prior written consent of the Company, solicit or assist in the solicitation of any employee or former employee of the Company or its Subsidiaries unless such person shall have ceased to be employed by the Company or such Subsidiary, other than as a result of the Stockholder's actions. The parties acknowledge that mere knowledge by a Company employee of the 41 existence of a competing business by Stockholder shall not constitute a solicitation of such employee. 3. Reasonableness of Covenants. The Stockholder expressly understands --------------------------- and agrees that although the Company and Zeneca consider the restrictions contained in Paragraph 1 and 2 above to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against the Stockholder, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein. 4. Injunctive Relief and Specific Performance. The Stockholder ------------------------------------------ acknowledges and agrees that Zeneca's and the Company's remedies at law for breach of any of the provisions of this Agreement would be inadequate and, in recognition of this fact, the Stockholder agrees that, in the event of such a breach, in addition to any remedies at law, the Company and Zeneca, or either, without posting any 42 bond, shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available in any county in which the Company or its Subsidiaries are engaged in the Business or from which they derive a reasonable amount of their Business at the time of the breach. The Stockholder further acknowledges that should the Stockholder violate any of the provisions of this Agreement, it will be difficult to determine the amount of damages resulting to the Company and in addition to any other remedies which it may have, the Company and Zeneca or either shall be entitled to temporary and permanent injunctive relief without the necessity of proving damages. 5. Acknowledgment. Each of the Stockholder, Zeneca and the Company -------------- acknowledges and agrees that the covenants contained in Agreement have been negotiated in good faith by the parties, are reasonable and are not more restrictive or broader than necessary to protect the interests of the parties hereto, and would not achieve their intended purpose if they were on different terms or for periods of time shorter than the periods of time provided herein or applied in more restrictive geographical areas than are provided herein. Each party further acknowledges and agrees that Zeneca would not enter into the Merger Agreement and the transactions contemplated thereby 43 (including, without limitation, the acquisition of the shares of the Company outstanding prior to the Merger from the Stockholder pursuant to the Merger Agreement) but for the covenants contained in this Agreement and that such covenants are essential to protect the value of the Business. Each party agrees further that the transactions of which this Agreement is a part involves more than $100,000. 6. Miscellaneous. ------------- A. Entire Agreement. This is the entire agreement of the parties ---------------- relating to the subject matter set fort herein. Except as specifically set forth in this Agreement, there are no other understandings or agreements concerning the subject matter hereof between the parties which have been relied upon or which shall survive the execution hereof. This Agreement supersedes any and all other agreements or understandings, oral or written, between the parties concerning the subject matter set forth herein. Notwithstanding the foregoing, in the event that the transactions contemplated by the Merger Agreement are not consummated, this Agreement shall terminate. B. Modification. This Agreement may not be modified or varied in any ------------ way, except by a subsequent writing signed by each of the parties hereto. C. Assignment. This Agreement may not, in whole or in part, be ---------- assigned by any party. 44 D. Gender and Number. As used herein, where the content so indicates, ----------------- reference to one gender includes the other and the neuter and vice versa, if applicable under the circumstances. When the context so indicates that such is the intent, words in the singular include the plural and vice versa. E. Invalidity and Severability. In the event any provision herein --------------------------- contained shall be declared by a court of competent jurisdiction to be invalid, that provision shall be limited to the extent necessary to make it enforceable, and if necessary, severed from the Agreement. Notwithstanding the unenforceable provision, the remaining provisions hereof shall be deemed severable therefrom and remain in full force and effect. F. Governing Law: Jurisdiction and Venue. This Agreement and any ------------- dispute or claims arising hereunder shall be governed by, and construed according to, and enforced under the laws of the State of Delaware, without regard to the conflict of laws provisions of Delaware law. The State and Federal courts located in Delaware shall be the sole forum for any action for relief arising out of or pursuant to, or to enforce or interpret this Agreement. Each party to this Agreement consents to the personal jurisdiction in such forum and courts and each party hereto waives any right to seek a transfer of venue from such jurisdiction on any grounds. It is the specific intent of the parties that no 45 part of this Agreement be construed in accordance with or governed by the laws of any other country. G. Notices. any notice or demand hereunder shall be given in writing ------- at the address set forth below by personal service or registered or certified mail, postage prepaid, return receipt requested or overnight courier: 1. To Company at: 8201 Beverly Blvd. Los Angeles, CA 90048-4520 2. To Zeneca at: 15 Stanhope Gate London W1Y 6LN 3. To the Stockholder at: 8201 Beverly Blvd. Los Angeles, CA 90048-4520 and: 1170 Embury Street Pacific Palisades, CA 90272 With copies to Marshall Grossman, Dr. Bernard Salick and Leslie Bell at 8201 Beverly Blvd., Los Angeles, CA 90048-4520. Such address may be changed by notice to the other party given as above provided. Notices so given shall be deemed given upon receipt. H. Waiver. No waiver of any default or breach shall be implied from ------ any failure to take action on account of such default. No express written waiver shall be deemed to waiver or render unnecessary the consent or approval to or of any subsequent act. 46 I. Captions. Section captions used in this Agreement are descriptive -------- and for convenience only, and shall not affect the construction of this agreement. J. Independent Counsel; Interpretation. Each of the parties hereto has ----------------------------------- been represented by independent counsel in the negotiation and review of this Agreement. The provisions of this Agreement were negotiated by each of the parties hereto and this Agreement shall be deemed to have been drafted by each party. 47 I. Captions. Section captions used in this Agreement are descriptive -------- and for convenience only, and shall not affect the construction of this agreement. J. Independent Counsel; Interpretation. Each of the parties hereto has ----------------------------------- been represented by independent counsel in the negotiation and review of this Agreement. The provisions of this Agreement were negotiated by each of the parties hereto and this Agreement shall be deemed to have been drafted by each party. IN WITNESS HEREOF, the parties hereto have executed this Agreement effective the day and year first above written. ZENECA LIMITED an English Company By: /s/ Michael G. Carter, M.D. --------------------------- Michael G. Carter, M.D. SALICK HEALTH CARE, INC. a Delaware Corporation By: /s/ Leslie F. Bell --------------------------- Leslie F. Bell /s/ Patrick W. Jeffries --------------------------- Patrick W. Jeffries 48 SCHEDULE A California - ---------- Alameda County, Alpine County, Amador County, Butte County, Calaveras County, Colusa County, Contra Costa County, Del Note County, El Dorado County, Fresno County, Glenn County, Humboldt County, Imperial County, Inyo County, Kern County, Kings County, Lake County, Lassen County, Los Angeles County, Madera County, Marin County, Mariposa County, Mendocino County, Merced County, Modoc County, Mono County, Monterey County, Napa County, Nevada County, Orange County, Placer County, Plumas County, Riverside County, Sacramento County, San Benito County, San Bernardino County, San Diego County, San Francisco County, San Juaquin County, San Luis Obispo County, San Mateo County, San Barbara County, Santa Clara County, Santa Cruz County, Shasta County, Sierra County , Siskiyou County, Solano County, Sonoma County, Stanislaus County, Sutter County, Tehama County, Trinity County, Tulare County, Tuolumne County, Ventura County, Yolo County, Yuba County Delaware - -------- Kent County, New Castle County, Sussex County Florida - ------- Bradford County, Brevard County, Charlotte County, Citrus County, Columbia County, De Soto County, Gadsden County, Gilchrist County, Glades County, Hernando County, Hillsborough County, Lafayette County, Lake County, Lee County, Leon County, Madison County, Nassua County, Okaloosa County, Okeechobee County, Orange County, Palm Beach County, Pasco County, Santa Rosa County, Suwannee County, Walton County Kansas - ------ Brown County, Chase County, Clark County, Cloud County, Cowley County, Crawford County, Decatur County, Douglas County, Elk County, Finney County, Franklin County, Geary County, Greeley County, Greenwood County, Kearny County, Lane County, Leavenworth County, Lyon County, Marion County, Marshall County, Meade County, Mitchell County, Neosho County, Osborne County, Phillips County, Pratt County, Reno County, Republic County, Rush County, Saline County, Scott County, Sedgwick County, Shawnee County, Sherman County, Sumner County, Thomas County, Wichita County, Wyandotte County 49 Missouri - -------- Adair County, Andrew County, Atchison County, Audrain County, Barry County, Barton County, Bates County, Benton County, Bollinger County, Boone County, Buchanan County, Butler County, Caldwell County, Callaway County, Camden County, Cape Girardeau County, Carroll Conty, Carter County, Cass County, Cedar County, Charlton County, Christian County, Clark County, Clay County, Clinton County, Cole County, Cooper County, Carwford County, Dade County, Dallas County, Daviess County, De Kalb County, Dent County, Douglas County, Dunklin County, Franklin County, Gasconade County, Gentry County, Greene County, Grundy County, Harrison County, Henry County, Hickory County, Holt County, Howard County, Howell County, Iron County, Jackson County, Jasper County, Jefferson County, Johnson County, Knox County, Laclede County, Lafayette County, Lawrence County, Lewis County, Lincoln County, Linn County, Livingston County, Macon County, Madison County, Maries County, Marion County, McDonald County, Mercer County, Miller County, Mississippi County, Moniteau County, Monroe County, Montgomery County, Morgan County, New Madrid County, Newton County, Nodaway County, Oregon County, Osage County, Ozark Couanty, Pemiscot County, Perry County, Pettis County, Phelps County, Pike County, Platte County, Polk County, Pulaski County, Putnam County, Ralls County, Randolph County, Ray County, Reynolds County, Ripley County, Saline County, Schuyler County, Scotland County, Scott County, Shannon County, Shelby County, St. Charles County, St. Clair County, St. Francois County, St. Louis County, Ste. Genevieve County, Stoddard County, Stone County, Sullivan County, Taney County, Texas County, Vernon County, Warren County, Washington County, Wayne County, Webster County, Worth County, Wright County New Jersey - ---------- Atlantic County, Bergen County, Burlington County, Camden County, Cape May County, Cumberland County, Essex County, Gloucester County, Hudson County, Hunterdon County, Mercer County, Middlesex County, Monmouth County, Morris County, Ocean County, Passaic County, Salem County, Somerset County, Sussex County, Union County, Warren County Pennsylvania - ------------ Adams County, Allegheny County, Armstrong County, Beaver County, Bedford County, Berks County, Blair County, Bradford County, Bucks County, Butler County, Cambria County, Cameron County, Carbon County, Centre County, Chester County, Clairon County, Clearfield County, Clinton County, Columbia 50 County, Crawford County, Cumberland County, Dauphin County, Delaware County, Elk County, Erie County, Fayette County, Forest County, Franklin County, Fulton County, Greene County, Huntingdon County, Indiana County, Jefferson County, Juniata County, Lackawanna County, Lancaster County, Lawrence County, Lebanon County, Lehigh County, Luzerne County, Lycoming County, McKean County, Mercer County, Mifflin County, Monroe County, Montgomery County, Montour County, Northampton County, Northumberland County, Perry County, Philadelphia County, Pike County, Potter County, Schuylkill County, Snyder County, Somerset County, Sullivan County, Susquehanna County, Tioga County, Union County, Venango County, Warren County, Washington County, Wayne County, Westmoreland County, Wyoming County, York County Virginia - -------- Albemarle County, Alleghany County, Bath County, Bland County, Buckingham County, Campbell County, Caroline County, Carroll County, Fairfax County, Floyd County, Fluvanna County, Gloucester County, Isle of Wright County, King and Queen County, Louisa County, Madison County, Mecklenburg County, Nelson County, Northampton County, Page County, Patrick County, Powhatan County, Prince William County, Pulaski County, Rappahannock County, Roanoke County, Rockbridge County, Shenandoah County, Southampton County, Sussex County, Tazewell County, Wise County, Wythe County 51 EX-11 4 COMPUTATION OF NET EARNINGS EXHIBIT 11 COMPUTATION OF NET EARNINGS PER COMMON SHARE (UNAUDITED)
Three Months Ended Six Months Ended February 29, February 28, February 29, February 28, 1996 1995 1996 1995 ------------ ------------ ------------ ------------ (Amounts in thousands, except per share data) Primary Average shares outstanding 11,297 9,578 11,295 9,026 Net effect of dilutive stock options--based on the treasury stock method using average market price 12 407 13 388 ------- ------- ------- ------- Total 11,309 9,985 11,308 9,414 ======= ======= ======= ======= Net income $ 2,217 $ 2,600 $ 4,987 $ 5,238 ======= ======= ======= ======= Per share data: Net income $ 0.20 $ 0.26 $ 0.44 $ .56 ======= ======= ======= ======= Fully diluted Average shares outstanding 11,297 9,578 11,295 9,026 Net effect of dilutive stock options--based on the treasury stock method using average market price or closing price if higher 12 417 14 428 Net effect of dilutive convertible debentures-- based on the stated conversion price of $14 per share 743 1,282 ------- ------- ------- ------- Total 11,309 10,738 11,309 10,736 ======= ======= ======= ======= Net income $ 2,217 $ 2,600 $ 4,987 $ 5,238 Convertible bond interest, net of income tax effect 118 408 ------- ------- ------- ------- $ 2,217 $ 2,718 $ 4,987 $ 5,646 ======= ======= ======= ======= Per share data: Net income $ 0.20 $ 0.25 $ 0.44 $ 0.53 ======= ======= ======= =======
EXHIBIT 11 52 EX-27 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary information extracted from Form 10-Q for the quarterly period ended February 29, 1996 and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS AUG-31-1996 SEP-01-1995 FEB-29-1996 378 46,580 45,606 3,353 1,801 101,472 142,471 36,735 220,227 73,951 0 0 0 11 134,661 220,227 0 76,624 0 69,612 0 0 392 8,245 3,258 0 0 0 0 4,987 0.44 0.44
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